Who is Buying US Treasuries

The quick answer to the question posed in the title is no one. Two weeks ago the US Department of Treasure released its own internal projections for the federal government’s budget deficits. The Treasury anticipates it will need to borrow about $1 trillion this fiscal year, $1.1 trillion next year and $1.3 the following year. Based on their projection, the national debt will exceed $25 trillion by 2020.

Where does the money come from? The government funds their debt by selling bills, notes or bonds and the main buyer of these IOUs are the federal reserve, the Chinese and the Japanese. Looking at them individually:

FEDERAL RESERVE

The federal reserve reeling from its miscalculations on its QE programs has announced that it will not longer conjure money (by printing more fiat) to buy US debt. The fact of the matter is either that they know the public will no longer put up with them printing money which devalues the money or that they’ve realized that it doesn’t work.

CHINESE GOVERNMENT

The Chinese said point blank last month that they were ‘rethinking’ their position on buying more US debt. Looking at the actions of the Chinese, they are shedding the US IOUs by using them to fund projects to build the one belt road. They are also not participating as vigorously in the US auctions. I believe that they are hesitant to dump the US treasuries en masse for fear it will collapse the system before they can devise a plan to crash it in a controlled fashion.

JAPANESE GOVERNMENT

The Japan government has acted as a puppet for the US for many years and now they have created an economic fiasco for their country. They are incapable of contributing to the US money pit as they are dealing with their own financial problems.

The future will bring higher interest rates. Economically, when demand for an asset (in this case, bonds) falls the price of the asset will fall. In the case of bonds, the face value of the bond is fixed so it can’t fall in price. What will happen is that the rate paid to the buyer will rise to entice the prospective buyer to purchase the bond, ergo the interest rate will rise.

Since the T-bill rate is the bench mark on which all other debentures are based, the overall bonds will likely rise. This means borrowing costs to industries and companies will increase. I’m sure you will be able to see how this will reverberate throughout the market place. The picture is bleak.